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Internationalization process of SMEs: motives and barriers
Case study of “Taste of North”
Anna Kozlova
BE309E International business and marketing
May 2014
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Abstrakt
Coviello og McAuley ( 1999 ) lagt merke til at før 1990-tallet var det en vanlig oppfatning at små og mellomstore bedrifter har begrensede muligheter for å utvide sin virksomhet i
utlandet.
Men en økende betydning av internasjonal markedsføring i løpet av de siste 20 årene ledet til økende av mengden av SMB som begynte å utvide sin virksomhet til internasjonale markedet.
Det er grunnen til at det var en stor utvikling av nye teorier med det formål å forklare hvorfor og hvordan bedrifter internasjonaliseres. Alle disse teorier og tilnærminger er rettet mot å tolke internasjonaliseringsprosess som foregår når et firma gjør en beslutning om å starte eksport aktiviteter.
Denne forskningen beskriver internasjonaliseringen av det lokale norske selskapet " Taste of North " for å få dypere forståelse av denne prosessen. Empiriske resultater er mottatt fra intervjuene med leder og eier av ovennevnte selskap. Alle de dataene jeg innhentet ble oppsummert, strukturert og klargjort for analyse.
De viktigste funnene i studien er beskrivelsen av motiver og barrierer i internasjonaliseringsprosessen av " Taste of North ".
Nøkkelord: SMB, internasjonalisering teorier, internasjonaliseringsprosess av SMB, motiver, barrierer, "Taste of North"
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Acknowledgements
During my studying on Master of Science in Business program I chose specialization in International Business and Marketing. And now I am done with my master thesis, which is the final assignment. The work on this thesis has been a challenge for me, because sometimes it was hard to write it. But at the same time, the process of writing master thesis was also
thrilling and extremely interesting. And I’m so grateful that I got opportunity to study in Bodø in University of Nordland.
I would like to thank every professor in the department of International Business and Marketing, especially Tor Korneliussen, Dominique Thon, Nils Magne Larsen and Nina Kramer Fromreide.
My very special gratitude goes to my supervisor Frode Nilssen, who helped me to conduct the process of writing my research paper.
My sincerest thanks go also to my friends and family for their support and help in difficult moments.
And last but not least, I would like to thank Sigurd Rydland for the inspiration and motivation, which I got during our meetings.
As author, I take full responsibility for the content of the present master thesis.
Bodø, 20 May 2014 Anna Kozlova
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Abstract
Coviello and McAuley (1999) noticed that before 1990s there were a common opinion that small and medium-sized enterprises have limited possibilities for expanding their activities abroad.
But a growing importance of the international marketing during the last 20 years leaded to increasing of amount of SMEs that started to extend its activities to international market.
That is why there was a big development of the new theories with the purpose to explain why and how companies internationalize. All of this theories and approaches are aimed to interpret the internationalization process which takes place, when a firm makes a decision to start export activities.
This research describes the internationalization process of the local Norwegian company
“Taste of North” in order to get deeper understanding of this process. Empirical results are received from the interviews with the leader and owner of above-mentioned company. All of the data I obtained were summarized, structured and prepared for analysis.
The main findings of the study represent the description of motives and barriers of the internationalization process of “Taste of North”.
Keywords: SMEs, internationalization theories, internationalization process of SMEs, motives, barriers, ”Taste of North”.
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Content
Sammendrag………2
Acknowledgements……….3
Abstract………...4
List of figures………..7
List of tables………8
1. Introduction……….9
1.1 Background of the research……….10
1.2 Research purpose and research questions………...11
1.3 Limitations and implications………...11
1.4 Outline of the thesis………12
2. Theoretical framework………..14
2.1 Definition of internationalization ………...14
2.2 Theories of internationalization………..14
2.2.1 Economic approach of internationalization………15
a. Transaction Cost Analysis Model……….16
b. Dunning’s eclectic theory……….17
c. International Product Life Cycle Model………...18
2.2.2 Behavioral approach of internationalization………...18
a. Ahroni’s Decision Making Model………....19
b. Uppsala Model………..20
c. Innovation-Related Internationalization Models………...22
2.3 Latest internationalization approaches………24
a. Born Global………...24
b. Network theory……….26
2.4 Internationalization motives………28
2.4.1 Proactive motives………29
2.4.2 Reactive motives……….30
2.5 Internationalization triggers………32
2.6 Internationalization barriers and risks……….……35
2.7 Summary………...36
3. Methodological part………..37
3.1 Definition of methodology……….…37
3.2 Choice of philosophical position………38
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3.3 Formulating the research design………...39
3.4 Research strategy………40
3.5 Data collection………....42
3.6 Data analysis………...45
3.7 Quality of research issues………...……46
3.8 Summary……….47
4. Empirical part………..…..48
4.1 Presentation of the company “Taste of North”………...48
4.2 The results of the interviews………...49
4.3 Empirical findings………...…52
4.4 Summary……….…53
5. Analysis and discussion………..…..54
5.1 Internationalization process of “Taste of North”……….…..54
5.2 Motives of the internationalization of “Taste of North”………..……..56
5.3 Internationalization barriers………...….57
5.4 Summary……….……58
6. Conclusions………...…59
6.1 Summary of the study………...…..59
6.2 Suggestions for the future research………...60
Bibliography……….…61
Appendix 1: Interview Guide……….………..…68
Appendix 2: Products of the company……….69
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List of figures
Figure 1.4 The structure of the master thesis………12
Figure 2.2.1 Firm’s specific advantages needed when entering foreign markets according to Dunning’s eclectic theory……….17
Figure 2.2.2 Internationalization process of the firm………....21
Figure 2.3.1 Born Global conceptual framework……….25
Figure 2.3.2 En example of an international network………...…27
Figure 2.4 Pre-internationalization: initiation of SME internationalization……….…28
Figure 3 The research process plan………...37
Figure 4.3 Chronology of firm’s activities………..……….….52
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List of tables
Table 2.2 The main internal and external variables both approaches to internationalization
theory focuses on………..15
Table 2.2.1 The International Product Life Cycle Model……….18
Table 2.2.2 Innovation-related internationalization models………...……..23
Table 2.4. Major motives for starting export………...….29
Table 3.2 Implications of social constructionism………...………..39
Table 3.4 Relevant situations for different research strategies………41
Table 5.1 Comparative characteristics of firms………..….56
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Chapter 1 Introduction
International marketing has a huge importance for companies of all sizes in the 21st century.
Most of the worldwide companies use materials, equipment or sell products to other nations.
International sales provide additional income for companies, and for some of them it is the only way to get profit.
A growing importance of the international marketing during the last 20 years is the result of many interrelated factors:
- There were a reduction of barriers to trade and investment through various
agreements. This fact helped many companies to expand export activities and to create production and sales abroad.
- Development in transportation and logistics continued to decrease the costs of exporting and importing.
- Entrepreneurial novelties and improvements in technologies have gotten a result in the creation of new services and goods that became attractive for international markets.
- Markets became wide and linked because of the emergence of electronic commerce (e-commerce).
- Industries and firms in different countries became interdependent with regard to materials and business activities.
- Capital markets became international because their regulations were decreased and this process leaded to increasing growth of cross-national connections.
- Different industries in many countries have excess capacities. It was partly a result of increased productivity in existing and new facilities. National and local producers managed to achieve economies of scale, use of oversupply of labor and to sell
products in new zones. All of these factors increased the attempts of many companies to export activities.
- The commerce around the world continued to expand faster than world gross national product and this promoted to increase importance of international markets. (Albaum et.al, 2005)
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1.1 Background of the research
During last 50 years many researches created different theories with a purpose to explain why and how companies internationalize. There were a lot of debates about existing theories of the internationalization process of the firm. But all of them had a goal to explain
internationalization processes which take place, when a firm makes a decision to expand across national borders.
Coviello and McAuley (1999) noticed that before 1990s there were a common opinion that small and medium-sized enterprises (SMEs) have limited possibilities for expanding their activities abroad. SMEs have limited financial and administrative resources in comparison with the large firms. Often SMEs do not have enough information resources, because of limited network connections. These factors had a big influence on the role of SMEs in the international marketing activities and were the reason why SMEs considered to be unlikely to internationalize (Bilkey and Tesar, 1977).
During 1990s and further different researches began to describe another way of internationalization process of SMEs (Knight and Cavusgil, 1996). SMEs became a significant part of advanced market economies and transitions economies (Fillis, 2001).
Studies show that many firms managed to reach international markets with a high rapidity and a fast resource commitments. These firms were often created by persons with international experience from their background that is an important reason for initial process of the internationalization of the firm (Madsen and Servais, 1997).
Description of the internationalization process of the firm includes several considerable parts, such as a formulating a proper strategy to enter new market, choice of a market entry mode, consideration of possible risks, uncertainties and barriers which the firm can face during the whole process. Market knowledge is one of the most important elements for creating a good strategy for becoming a participant of international market. There are other factors which also should be taken into account, such as manager’s skills, financial resources, age and size of the firm, etc. Every company should consider all of these and many other factors, I will talk about further in the thesis, when it decides to expand its activities abroad to try to prevent and avoid a possible failure.
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1.2 Research purpose and research questions
The purpose of the master thesis is to get a better understanding of the internationalization process of the firm on the example of one specific company. To achieve this goal I will analyze existing theories of internationalization, which are applicable for big and small companies and will get a deep insight into the process by obtaining information about export activities of a Norwegian firm operating abroad.
In order to reach the purpose of the study, the following research questions were created, which guided me during of the study process:
To accomplish a task I will analyze the company “Taste of North”, which has a main office in Bodø and a factory in Tysfjord.
1.3 Limitations and implications
There are external and internal factors, which have an influence on the internationalization process of the firm. It means that this process can differ in different companies in different countries, because of differences in company’s technologies, business culture, owner and manager of the company, economic conditions, infrastructure, etc. Thus, the main limitation of the study is that I will describe internationalization process of the particular company in Norway. But in spite of this limitation, this study can be relevant for other future
investigations in this area. Norway is the developed country, member of several trade
associations such as, European Free Trade Association, Canada-EFTA Free Trade Agreement and World Trade Organization (source: websites of EFTA and WTO). Thereby, it means that this research can be applicable for companies in the countries, which are member of the same associations and have similar business conditions.
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1.4 Outline of the thesis
The master thesis consists of several parts: introduction, theoretical chapter, methodological chapter, empirical chapter, analytical chapter and conclusions. The structure of the thesis is shown on the figure 1.4.
Figure 1.4 The structure of the master thesis
Introduction presents background of the topic, research purpose, research questions, limitations and implications of the study.
Theoretical chapter includes important and relevant internationalization theories. These theories were chosen as the most significant theories, which describe the internationalization process of the firm.
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13 Methodological chapter discusses methodological and philosophical issues of the master thesis. It also has description of data collection and research design.
Empirical chapter presentes main empirical findings, which were discovered during the interviews with the leader of the company ”Taste of North”.
Chapter of analysis and discussion represent findings of the research by analyzing it through the prism of theoretical framework.
The last chapter reveals main findings and conclusions of the master thesis and suggestions for the future research of the topic.
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Chapter 2 Theoretical framework
The current chapter is devoted to give general understanding of the internationalization process and its theoretical foundation. The main internationalization approaches, motives, barriers and risks will be also discussed in this chapter.
2.1 Definition of internationalization
The object of the research is to study the process of internationalization of a firm. First of all, let’s give a definition of it. A review of the literature shows that currently there is no agreed definition of internationalization. We can view internationalization as a process of increasing involvement of enterprises in international markets (Welch & Luostarinen, 1988). The origin of the process stems in the 1960s, when Simmonds and Smith identified internationalization as a successful route to increase exports (McAuley, 2001). This work became formalized into models of export behavior, mainly by a number of Swedish researchers including Johanson, Olson and Wiedersheim-Paul (1978) who stated that “internationalization usually refers to either an attitude of the firm towards foreign activities or to the actual carrying out activities abroad”. For them it was the interaction of these attitudes and actual behavior which describe the internationalization process (McAuley, 2001).
2.2. Theories of internationalization
Literature review shows that existing internationalization theories can be divided into two groups: theories that describe internationalization with the economic approach and theories that describe internationalization with the behavioral approach (Andersson, 2000; Mort and Weerawardena, 2006). Economic approach is applicable for large multinational enterprises (MNEs) and behavioral approarch is developed for small and medium sized enterprises (SMEs).
Seifert and Machadoda- Silva (2007) wrote that internationalization can be influenced by external and internal variables. We can see main aspects of both variables in a table 2.2.
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15 Table 2.2 The main internal and external variables both approaches to internationalization theory focuses on (adopted from Seifert and Machadoda- Silva 2007, p.42)
Now let’s talk about every aspect in the both approaches and discuss examples of theories that follow each approach.
2.2.1. Economic approach of internationalization
The economic approach is based on mainstream economics, and has its focus on the company and its environment (Andersson, 2000). The main assumption of the economic approach is that firms are quasi rational in their choice of investments and that the decision maker has access to perfect information. He is rational and will choose the optimal solution.
(Seifert and Machado-da-Silva, 2007).
Jones (1999) claims that theories, that follow the economic approach, have tended to advocate a gradual move from lowcost, low-risk strategies, such as exporting, to higher-cost, higher- risk strategies, such as wholly owned production subsidiaries.
There are several economic theories that have been proposed to explain the choice of foreign entry modes by firms. Among the best known are Transaction Cost Analysis Model,
Dunning’s eclectic theory and International Product Life Cycle Model (Hermannsdottir, 2008). Each of these theories will be discussed and explained.
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The foundation for this model was made by Ronald Coase (1937). He argued that “a firm will tend to expand until the cost of organizing an extra transaction within the firm will become equal to the cost of carrying out the same transaction by means of an exchange on the open market”(p.395). It is a theory which predicts that a firm will perform internally those activities it can undertake at lower cost through establishing an internal (‘hierarchical’) management control and implementation system while relying on the market for activities in which independent outsiders (such as export intermediaries, agents or distributors) have a cost advantage (Hollensen, 2014).
Transaction costs emerge when markets fail to operate under the requirements of perfect competition (‘friction free’); the cost of operating in such markets (i.e.the transaction cost) would be zero, and there would be little or no incentive to impose any impediments to free market exchange. However, in the real world there is always some kind of ‘friction’ between buyer and seller, resulting in transaction costs (Hollensen, 2014).
A high level of transaction cost results in a preference for internalizing the transaction
(Johanson and Mattsson, 1987). Firms therefore decide to produce abroad if they perceive that the reduction in transaction costs resulting from the replacement of the external imperfect markets will be greater than the cost of organizing such activities internally. Otherwise, foreign markets will be supplied by exports, licensed sales, or some other form of international activity (Anastassopoulos and Traill, 1998). TCA model predicts that
international expansion of the firm will start in nearby markets, because administrative and risk-taking cost will be lower in such markets (Johanson and Mattsson, 1987).
b) Dunning’s eclectic theory
The eclectic paradigm is also known as the OLI-Model or OLI-Framework. It was developed by the British economist John Harry Dunning. The intention was to offer a holistic framework by which it was possible to identify and evaluate the significance of the factors influencing both the initial act of foreign production by enterprises and the growth of such production (Dunning, 1988). Glückler (2006) says, that Dunning’s model is eclectic because it integrates distinct explanatory approaches from different theories into one single framework.
According to the theory, the firm’s decision to enter a foreign market and the choice of entry form depend on a combination of three advantages that are necessary conditions for
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17 entry into foreign markets (Dunning, 1988). First of all, firm must have a specific Ownership advantage, which compensates for the general “liability of foreignness” that comes from operating at a distance as well as the generally superior competitive position of rival domestic firms in the target market (Benito and Gripsrud, 1992). Second, the Location advantage of the target market has to be identified and to be evaluated with respect to its fit with the firm’s strategy (Ólafsson and Hermannsdóttir, 2009). Third, there are Internalization advantages which refer to the benefits of retaining assets and skills within the firm. I-advantages accrue to firm from the internal use of its O-advantages rather than renting them out to external parties in the form of licensing agreements or franchising (Mtigwe, 2006).
Figure 2.2.1 describes all three advantages in the eclectic theory.
Figure 2.2.1 Firm’s specific advantages needed when entering foreign
markets according to Dunning’s eclectic theory (adopted from Hermannsdottir 2008, p.7)
c) International Product Life Cycle (IPLC)Model
This theory was developed by Raymond Vernon. IPLC modell is based on product life cycle, which consists from four stages: introduction, growth, maturity and decline. Location of production depends on the stage of the cycle. The introduction stage is domestic and innovators locate production activities at home where the product was developed The firm will start to export, when it gets enough knowledge about the foreign market, so it manages to
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18 shift production abroad. When the product reaches the growth stage, export activities will increase and the product will be expanded to new markets. At the maturity stage major markets are saturated and a certain degree of standardization of the product has usually taken place (Melin, 1992). Firms will start to be concerned more about production costs than about product characteristics. It leads to a change of the location of production facilities to the less developed countries with the lower production costs (Almor et al.,2006). At the end, the firm will export its product from the less developed countries back to the original innovating country (Sikorski and Menkhoff, 2000). According to IPLC model, cost advantage and low labour cost are the major motivating factors. Firms will move endlessly between different locations to secure and maintain their cost advantage (Mtigwe, 2006). Next table shows three stages of IPLC model.
Table 2.2.1 The International Product Life Cycle Model (adopted from Hermannsdottir 2008, p.10)
2.2.2. Behavioral approach of internationalization
Behavioral approach is based on organizational theory. It also can be called process approach.
The main role in this approach is an importance of organizational knowledge in the process of internationalization. International experience has a great influence on the rate and direction of internationalization (Clercq, Sapienza and Crijns, 2005). As it was mentioned above,
behavioral approach of internationalization was developed in order to describe the internationalization process of SMEs.
Models which follow behavioural approach show an importance of knowledge of top managers, when it comes to understanding of the international behavior of the firm
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foreign market come from a special knowledge of international markets of the person(s) who is responsible for making decisions (Erramilli and Rao, 1990).
There are several theoretical models which can be applied to behavioral approach of the internationalization process. Ahroni’s Decision Making Model, Uppsala Model and Innovation-Related Internationalization Models are well-known models of this approach.
These three models will be discussed in the next part of my work.
a) Ahroni’s Decision Making Model
This model was made by Yair Ahroni in 1966. He perceived internationalization as a
complicated of social process with “many different attitudes and opinions, social relationships both inside and outside the firm and the way such attitudes, opinions and social relations are changing”(Aharoni 1966, p.13). He described different stages of the process of
internationalization and underlined the importance of market information, possible risks and previous experience of decision maker. Social and organizational structures of the firm, its history and some problems, which the firm can face at the moment, also play an important role in the decision to export.
When the decision maker starts to export for the first time, he comes to new, unknown way.
There are some triggers, which can push the firm to start internationalization process. It can be a business proposal, which the firm gets from abroad. Or maybe competing firms have successful activities abroad and this fact leads to make firm’s decision about beginning its own abroad activities (Törnroos, 2002).
The decision to look abroad is often a combination of several motivating factors, not only the one specific factor. Those factors create the situation, when the decision maker feels that export can help to solve some problems of the firm, create important business activities or simply give income for important needs, which the firm has. All of these factors lead the firm to the way of changing the focus from domestic market and look about possibilities abroad.
The decision to start business abroad is a decision to find possibilities in a specific market in a specific country, not the decision to look around the whole globe (Aharoni, 1966).
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20 b) Uppsala Model
The Uppsala model explains internationalization as a process of gradual learning of the firm through experiences gained from foreign markets. It was introduced by Swedish researches from Uppsala University Johanson and Wiedersheim-Paul in 1975.
The model explains two patters in the internationalization process of the firm. First pattern is that firm’s level of engagement within specific country follows an establishment chain, which is a sequence of stages, such as:
1. No regular export activities
2. Export via independent representatives (agents) 3. Establishment of an overseas sales subsidiary 4. Overseas production/manufacturing units
The firm gets a gradual increase in market experience with the every stage (Johanson and Wiedersheim-Paul, 1975).
Second pattern is that firms enter new markets with a big differences in language, culture, political system, in other words, markets that have great psychic distance from the home market. In many cases, those markets have a big geographical distance too. There is a huge role of firm’s experience that helps the firm to find new business opportunities and reduce a risk of uncertainty which take place, when the firm enter to a new market. (Johanson and Vahlne, 1990).
Johanson and Wiedersheim-Paul's theory was futher developed and revised by Johanson and Vahlne (1977,1990,2006). They formulated a dynamic model to explain growing character of internationalization. Johanson and Vahlne (1977, p.23) argue that the model has focus “on of the development of individual firm and particularly on its gradual acquisition, integration, and the use of knowledge about foreign markets and operations and on its successively increasing commitment to foreign markets”. Dynamic model is such a model, where the output of one cycle of events establishes the input of the next. This model consists of state and change aspects. The state aspects are the market commitment (resource commitment to the new markets) and the knowledge about these new markets. The change aspects are decisions to
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21 commit resources and performance of present activities of the firm (Johanson and Vahlne, 1990). The mechanism of the model is shown on the Figure 2.2.2.
Figure 2.2.2 Internationalization process of the firm (adopted from Johanson and Vahlne 1990, p.12).
Johanson and Vahlne (1990) assumed that market knowledge and market commitment affect commitment decisions and current activities, and these, in rotation, change market
commitment and knowledge.
One of the main assumptions of this model is that “the lack of knowledge is an important obstacle to the development of international operations” (Johanson and Vahlne, 1977 p.23) So when the firm starts its international activities, it supposes to have general knowledge and knowledge of a specific market. The better knowledge firm has about market, the stronger market commitment it has (Johanson and Vahlne, 1990).
Market commitment consists of the amount of resources committed (size of the investment in the new market) and the degree of commitment (difficulty to find an alternative use for resources).
Authors (1990) underline that business activities of the firm are the main source of firm’s experience and the commitment decisions depend on it and, in turn, relate to the current business activities of the firm.
Uppsala model shows an importance of the learning process of the firm and interaction
between development of market knowledge that the firm gradually gets and increasing foreign market commitments (Johanson and Vahlne, 2006).
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22 c) Innovation-Related Internationalization Models
Innovation-related internationalization models were created on the basis of the Uppsala model (Andersen, 1993). Andersen (1993) writes about four well-known models which were
presented during the period 1977-1982. These models use innovation-related perspective to describe the internationalization process. In other words, decision about internationalization is always an innovation for the firm (Andersen, 1993).
Reid (1981) supposed that viewing export process as an innovation can help us to understand initiation and developing of it. He also said that motivations, hopes and previous experience of decision-maker have a significant influence on the process of internationalization.
Innovation-related internationalization models show us a sequential process toward a deeper spreading into new markets (Luostarinen, 1979).
Table 2.2.2 represents a short review of these four innovation-related internationalization models.
The main differences in Innovation-related models are the number of stages (between 5-6) the firm goes through during the internationalization process and the description of every stage.
For example, the firm’s motivation to start export has different explanation in different works.
Bilkey and Tesar (1977) and Czinkota (1982) suppose that during the Stage 1 the firm is not interested in exporting and only partially interested at Stage 2. So Andersen (1993) concludes that there is a “push”-mechanism which can affect the firm. By the words “push”-mechanism, he means an external change which initiates the decision to export.
Cavusgil (1980) and Reid (1981) suppose that the firm is more active and interested in export during the early stages. Andersen (1993) explains it by describing a “pull”-mechanism. The
“pull”-mechanism is an internal change which initiates the movement of firm’s from one stage to another.
Table 2.2.2 Innovation-related internationalization models (adopted from Andersen 1993, p.213)
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Andersen (1993) underlines that every new stage in the internationalization process represents more experiential knowledge. He also says that the innovation-related models are applied from the moment of initiation of an idea about exporting to the moment the firm sees its international activities as ordinary and common part.
As it was mentioned above, there are external and internal factors that influence firm’s
initiation to export. Vissak (2003) describes such internal factors, as general characteristics of the firm (size, background, and goals), decision-maker characteristics (age, country of birth, value system and past experience) and the level of organizational commitment to export marketing, which includes willingness to learn and spare resources to export activities. There were also describes such external factors, as home country conditions (size, demand in domestic market, level of competitors, production and transport costs), industry
characteristics, which includes foreign and domestic competition, national policies (export support services and export incentives) and foreign market conditions (size, level of competitors, trade barriers and product standards) (Vissak, 2003).
The key elements of innovation-related internationalization theories are export attitude and knowledge the firm gets during export activities and the way these features influence choice of country and recognition of potential market opportunities (Vissak, 2003).
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2.3. Latest internationalization approaches
Some researches (Jones, 1999; Collinson and Houlden, 2005) noticed that there were changes in the internationalization process of the SMEs. That was the reason for developing of the newest internationalization approaches.
Glückler (2006, p.369) states that “firm internationalization has become a more complex phenomenon than the initially theorized in the mainstream approaches”. He mentioned two reasons of it. First, firm’s international expansion has not only grown in traditional
manufacturing-based businesses, but also in services (especially in knowledge-intensive services). Second reason is that firm’s internationalization is no longer relates to only large firms, but also to medium, small and micro firms.
SMEs often have limited amount of the resources and low brand recognition that makes the process of entering to the new markets more complicated for them. A failure in the new market can be fatal for SMEs, because investments firms have to make to enter the new
market are often high in comparison with the firm’s available resources (Buckley et al., 2004).
Most of the researches were based on the cases of multinational enterprises and several authors were not sure that it is possible to use these researches for SMEs (Jones, 1999;
Collinson and Houlden, 2005; Glückler, 2006). That was the reason why were created new theoretical approaches, which are applicable for internationalization process of SMEs: Born Global and Network theory. Let’s discuss both approaches in details.
a) Born Global
Kalinic (2009) describes Born Global firms as firms having international direction in business activities from their inception. Such firms can reach a specific degree of internationalization within some years. Some authors notice that it can take only two years for the firm to
internationalize from the moment of its foundation (Mckinsey, 1993), other researches write that it take up to three years (Knight and Cavusgil, 2004). And the last group of researches defines the period of internationalization for firms as eight years (McDougal and Oviatt, 1994). Different authors argue about time that the firm needs to internationalize, but all the authors agree that Born Global firms enter new markets by turning into a lead market or a global niche marker and they often ignore their domestic market (Bell, 1995; Coviello and Munro, 1995).
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25 Loane and Bell (2006) mentioned that Born Global firms view the whole world as an arena for their business activities and use opportunities in different markets, irrespective of geographic and psychic distances involved.
Andersson and Wictor (2003) developed a conceptual framework that describes factors, which have influence on development of Born Global firms. This framework is shown on the figure 2.3.1.
Figure 2.3.1 Born Global conceptual framework (adopted from Andersson and Wictor 2003, p.254)
As we can see on this figure, the authors divided factors that have influence on Born Global firms into four main groups: entrepreneur, industry, networks and globalization.
1. One of the key features of Born Global firms is personal characteristics of its entrepreneur/owner or manager of the company, such as global mindset, being innovative, proactive and risk taking (Mort and Weerawardena, 2006). Oviatt and McDougall (1997) noticed that this person should also have a high degree of previous international experience. If manager/owner of the firm previously has practical
knowledge about other markets, the Born Global firm has a big opportunity to engage in new markets quite fast (Madsen and Servais, 1997).
2. Characteristics of the industry play an important role in understanding of international development of Born Global firms. Madsen and Servais (1997) noticed that these firms have tendency to be more niche-oriented than other firms.
3. Network features has also a significant role for Born Global firms. Every firm has to develop and contribute its relationships with suppliers, financiers and customers from the moment of the appearance of the firm (Andersson and Wictor, 2003).
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26 4. Globalization is last factor that has influence on Born Global companies according to
Andersson and Wictor. It creates progress in communication technology, transportation and decrease trade barriers.
Chetty and Campbell-Hunt (2003) suppose that Born Global firms have a tendency for being established in small countries with open economies and progressive technologies. These countries can also have a limited local demand for products, and it can stimulate firms to export from the moment of their establishment (Knight and Cavusgil, 2004). Gabrielsson and Kirpalani (2004) wrote that the examples of such countries can be called Finland, Sweden, Denmark, Israel, Australia and New Zealand.
b) Network theory
Network theory underlines the importance of business relationships of the firm during its internationalization process. Networks facilitate firms to reach success by helping to find new market opportunities and get market knowledge (Coviello and Munro, 1995).
Rundh (2007) defines networks as a set of two or more connected exchange relationships.
Durrieu and Soldberg (2006) wrote that networks consist of independent agents or distributors, sales subsidiaries, local dealers and customers. Ford (2002) mentioned that supplier networks and distribution networks are the most important examples of firm’s networks.
Initially the firm has connections in domestic market, and during the internationalization process it gets other networks in foreign markets (Johanson and Vahlne, 2009). The firm can use domestic networks to form new network connections in a new country. Hollensen (2014, p.86) noticed that “a basic assumption in the network model is that the individual firm is dependent on resources controlled by other firms”. Powell et al. (1996) confirm it by saying that networks provide a path of innovation, because they give access to resources and knowledge that impossible to reach without network connections.
Coviello and Munro (1995) argued that network connections can have different intentions, for example, a reduce of the cost of production or contribution to the development of new
knowledge and competencies.
There is a huge importance of network relationships in the firm’s international market entry, because the firm’s decisions of entry way and market choice are influenced by its network partners (Coviello and Munro, 1995). The entry of a foreign market can be also the result of
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27 decision taken by the firm’s partner. Mtigwe (2006) argues that firm’s internationalization is newer an independent effort, but it is the result of network relationships. Glückler (2006) think that the position the firm has in the network has a strategic value and gradually becomes an intangible resource.
Bounds between different network agents in home and the new country are shown on the figure 2.3.2.
Figure 2.3.2 En example of an international network (adopted from Hollensen 2014, p. 87) Country A on the figure 4 is the home country of the firm. The firm has subsupplier in its home country. The subsupplier created a subsidiary in country B and it means that the firm has its production subsidiary in country B, because it is easy to use pre-existing relationship between the firm and subsupplier, than to create new in new country. By using this example, Hollensen (2014, p.87) shows that “the relationships of a firm in a domestic network can be used as bridges to other networks in other countries”.
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28 Mtigwe (2006) suppose that network mechanism accelerates internationalization process, because every network of the firm has a great value and gives necessary knowledge about new market very fast, than if the firm would not have network connection.
Johanson and Mattson (1988) view internationalization as a process, where the firm
establishes new relationship with foreign partners, develops and supports it continuously in order to achieve its own international development.
2.4. Internationalization motives
Internationalization occurs when a firm expands its research and development (R&D), production, selling and other business activities into international markets. However, for SMEs, internationalization is often a relatively discrete process; that is, ones in which management regards each internationalization venture as distinct and individual (Hollensen, 2014).
Freeman (2002) says that in the pre-internationalization stages, SME managers use
information to achieve relevant knowledge to start internationalization process. On figure 2.4 we can see different stages in pre-internationalization. Further I will talk more about every stage in this figure.
Figure 2.4 Pre-internationalization: initiation of SME internationalization (adopted from Hollensen 2014, p.53)
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29 For most firms the main factor to begin internationalization is to make money. But in general the only one factor cannot lead to the decision to start business abroad. Usually it is a mix of several reasons, which give an impact for exporting. Svend Hollensen (2014) divided internationalization motives into proactive and reactive motives.
Table 2.4. Major motives for starting export (adopted from Hollensen 2014, p.54)
Proactive motives show stimuli to attempt strategy change, based on the firm’s interest in exploiting unique competences (e.g. a special technological knowledge) or market
possibilities. Reactive motives indicate that the firm reacts to pressures or threats in its home market or in foreign markets and adjusts passively to them by changing its activities over time (Hollensen, 2014).
Let’s talk more about every internationalization motive.
2.4.1. Proactive motives
a) Profit and growth goals
During the stage of initial interest in exporting it is really important for SMEs to get short- term profit, because it will give a great motivation to continue with export. A wish of the firm to grow also has importance, when the firm makes a decision to start export. Hollensen (2014, p.54) supposes that “ the stronger the firm’s motivation to grow, the greater will be the
activities it generates, including search activity for new possibilities, in order to find means of fulfilling growth and profit ambitions”.
b) Managerial urge
Managerial urge is manager’s commitment and motivation that shows the desire and enthusiasm to drive internationalization forward. It can be a reflection of general entrepreneurial motivation: to continue growth and market expansion.
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30 c) Technology competence/unique product
The firm has an advantage on the international market, if it has unique technology or produce special goods or services. In this case the firm has a competitive edge over other firms and can have leading positions in business abroad. It will last until the firms-competitors get knowledge about technologies. The situation on the world’s market changes fast, because there are so many competing technologies and a lack of international patent protection.
d) Foreign market opportunities/market information
Some of the foreign markets are in the stage of growing and it provides a lot of opportunities for expansion-minded firms. The attraction of the south-east Asian markets is based on their economic successes, while the attraction of the Eastern European markets is rooted in their new-found political freedoms and desire to develop trade and economic relationships with countries in Western Europe, North America and Japan (Hollensen, 2014). Knowledge about new market gives advantage to the exporting firm from its competitors. Firm can get such knowledge from market’s research or special contacts/connections the firm may have inside of the new market.
e) Economies of scale
As we know, economies of scale are the cost advantages that a firm obtains due to expansion (Silvestre, 1987). So we can conclude that by increasing production for international market, the firm will get reduce of costs of production for domestic market. In other words, it is a double benefit for the firm.
f) Tax benefits
Hollensen (2014, p.57) describes tax mechanism on the example of United States of America.
Foreign Sales Corporation (FSC) provides firms with certain tax deferrals that allow the firm to offer its products at a lower cost in foreign markets or to accumulate a higher profit.
2.4.2. Reactive motives
a) Competitive pressures
A huge motivation for a firm to start business abroad is behavior of its competitors. As we talked above, firms that produce goods for international market, have benefits from
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31 economies of scale. It means that they can put a lower price for products on the domestic market and have bigger market share, than firms that don’t export and don’t gain profit and market share by doing export. And at the same time such firms will lose domestic market share, because they will have higher price than its competitors.
b) Domestic market: small and saturated
A firm starts to develop its export strategy, when it doesn’t see possibilities for increasing number of consumers on the domestic market. It can happen in case, if the firm produces special type of goods (for example, industrial products) that have few consumers located in different parts of the world.
Another reason for exporting is a saturated domestic market. As we know, each product has life cycle. There are 4 stages of product life cycle: introduction, growth, maturity, decline (Kotler and Keller, 2012). So it can be a situation, when the product reaches the stage of decline on the domestic market. And “instead of attempting a push-back of the life cycle process, or in addition to such an effort, firms may opt to prolong the product life cycle by expanding the market” (Hollensen, 2014, p.58). Usually level of product’s need is much lower in developing countries (product can be on the stage of growth there), in comparison with the level of product’s need in industrialized countries, where the same product can be on the stage of decline. That is the way firms use different international markets to prolong the life cycle of their goods.
c) Overproduction/excess capacity
Sometimes a firm can be in a situation, when it produces more goods than domestic market demand needs. In this case we talk about overproduction. And it can be a trigger for the firm to start sell goods abroad via short-term price cut. International activity can be stopped, when level of the domestic market demand returns. But if the firm will try to use this strategy again, it can meet problems, because some international customers are not interested just in
temporary business relationships and they will not want to do business with this firm again.
In some cases the company has to develop excess capacity and find other market opportunities, because there was a change in product demand in the domestic market.
Domestic market switched to new products and excess of goods, that company didn’t manage to sell here, will be sold abroad.
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32 d) Unsolicited foreign orders
Hollensen (2014, p.59) writes, that “many small companies have become aware of
opportunities in export markets, because their products generated enquiries from overseas.
These enquiries can result from advertising in trade journals that have worldwide circulation, through exhibitions and by other means. As a result a large percentage of exporting firms’
initial orders are unsolicited”.
e) Extend sales of seasonal products
Some companies produce specials products, which can be used during specific season (for example, agricultural machinery). Such companies can start export to get stable demand of its products during the whole years. They can deliver its products to the countries that are located in other hemisphere, because there is a difference in seasons between northern and southern hemispheres.
f) Proximity to international customers/psychological distance
Physical and psychological proximity to the international market is another factor that can have an influence in export activities of a firm. Many European firms automatically become international marketers because their neighbors are so close. For example, German firms established near the Austrian border can perceive their international activities as an extension of domestic activities, even though some of their product will go abroad.
Geographic proximity to foreign markets doesn’t mean that the firm, which is geographically close to the foreign customer, will be psychologically close to it. It depends on different cultural and legal factors and social norms, which can be different from one country to another. For example, research has shown that US firms perceive Canada as psychologically much closer than Mexico (Hollensen, 2014).
2.5 Internationalization triggers
Hollensen (2014) states that before the firm start the internationalization process there is something or someone that initiates the beginning of this process. Author calls it as trigger of internationalization – external or internal event that take place to start the whole process.
Rundh (2007) noticed that in most of the cases there is a combination of triggers, but not only one trigger that influences the internationalization process. As it was mention above, triggers
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33 can be external and internal. Hollensen (2014) argues that market demand, network partners, competing firms, financing and trade associations and outside experts belong to the group of external triggers. Let’s discuss every particular trigger in details.
1. Market demand
Hollensen (2014) noticed that increase of the demand in international markets can be a reason for some companies to export their production. Author gives an example of pharmaceutical companies, which managed to enter international markets, when it was a growth of demand for their products. Decline of domestic market also can be a motive to start business abroad, especially for SME’s, which can get higher profit and bigger volume of sales (Burca, Fletcher and Brown, 2004).
2. Network partners
As it was discussed in previous part of the paper, the company can use its external network partners as a source of new knowledge, so in this case network partners are the triggers for beginning of company’s internationalization. Vissak et al. (2008) said that the company, for example, can get access to international sales through distribution networks of their partners.
3. Competing firms
Hollensen (2014) also argues that if the company gets information that its competing company does a good business in the specific market, it can be a trigger for the company to begin internationalization process. Managers of the company have to think that company’s competitors can come and infringe on the company’s activities. Another reason for
internationalization process is the fact that competitors can come to domestic market of the firm and offer better products to the customers and lower prices. This activity, when SME enters home market of its competitors, calls a counterattack (Burca, Fletcher and Brown, 2004).
4. Financing
Financing resources of the firm are required to maintain firm’s international activities (for example, exhibiting at world trade fairs or for making changes required within the firm to begin export activities, such as the development of its managerial and marketing capabilities). Ability of the firm to get access to financial resources depends on the firm’s willingness to borrow funds
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34 from financial institutions. Grants that the firm can get from the government are a valuable source of finance during the beginning of the internationalization process (Hollensen, 2014).
5. Trade associations and outside experts
There is a huge importance of formal and informal meetings (such as conferences and trade associations’ meetings) between managers of companies, because it can lead the firm to decision of export. SME’s can make this decision on the basis of collective experience of the firm’s group they belong to (Hollensen, 2014).
Hollensen describes export agents, governments, Chambers of Commerce and banks as other outside experts that stimulate internationalization of the firm.
a) Export agents have experience in international activities from the before, have overseas contacts and approach expected exporters directly, if they see that their products have possibilities in the new markets.
b) Governments give motivation to start export for firms by providing export assistance programmes, making special governmental policy and laws.
c) Chambers of Commerce also try to motivate companies to enter new markets. They help to exporter and importer to get in touch with business abroad, by providing information about markets and helping them to find financial institutions capable to finance their global business activities.
d) Banks give the information about international opportunities to their domestic clients, because they want their services being used abroad, when the domestic clients expand internationally.
Now we will discuss the group of internal triggers of the internationalization process.
Hollensen (2014) supposes that this group consists of perceptive management, specific internal event and inward/outward internationalization.
a) Perceptive management
Perceptive managers are often informed about new business opportunities in overseas markets. One of the triggers for managers is business trips abroad, which help to get new market information. Other triggers are knowledge of foreign languages or interest in foreign cultures. These factors have a big influence on managers’ perception of new markets. Often managers come to the new firm with the experience of export activities in their previous jobs and they try to develop their background in the new company (Hollenden, 2014).
b) Specific internal event
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35 A specific event also can be a trigger for internationalization. For example, a new employee, who think that the firm should begin international activities, and manage to convince
management of the company to try it. It can also be overproduction or reduction in the domestic market size (Hollensen, 2014). Forsman at al. (2002) noticed that interest from the foreign companies to the local firm’s products and services also can motivate the decision of internationalization.
c) Inward/outward internationalization
Hollensen (2014) supposes that a successful inward internationalization (import) of the firm can lead to its outward internationalization (export). The natural way for firm’s
internationalization is to begin form inward activities, gain relationships and knowledge during this process and then to start with the outward activities (Welch et al., 2001).
Hollensen (2014) says that import activities can be initiated by:
- buyer, who has active international search for foreign sources;
- seller, who has initiation by the foreign suppliers.
2.6 Internationalization barriers and risks
Hollensen (2014) write that there are many different barriers that can disturb successful export activities. For example, barriers that can hinder the initiation of internationalization process are lack of finances, knowledge, international market connections, foreign distribution channels and increase of the cost. It can be also a barrier, if the firm has incomplete information about potential customers or competitors.
Hollensen (2014) divides barriers that hinder the process of internationalization into three groups: commercial risks (fluctuations of exchange rates, if the contracts are made in a foreign currency, inability to pay of export customers because of bankruptcy or contract disputes, harm of products during shipping or distribution process), political risks (national export policies, restrictions from foreign governments, big foreign tariffs on imported production, complication of trade documentation, lack of assistance from the government in overcoming export barriers) and general market risks (differences in languages and cultures of different countries, competitors in foreign markets, differences in products usage in specific market, problems to find a good distributor in the foreign market).
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36 Fillis (2002) noticed that the most common problems for firms after entering the new markets are to find a reliable distributor, to promote products and to conform prices of competitors.
There are some strategies which management of the company should use to avoid or reduce risks, such as a shunning of doing business in high-risk countries, using of variety of foreign markets, instead of being concentrated on one single and using government support, when it is possible).
2.7 Summary
First of all, this chapter provides understanding of the concept of the internationalization process and its main factors. Two main internationalization approaches were discussed (economic and behavioral). Economic approach was developed in order to discuss the internationalization process of MNEs and presented by the description of three main theories (Transaction Cost Analysis Model, Dunning’s eclectic theory and International Product Life Cycle Model). Behavioral approach was developed to understand the internationalization process of SMEs. I presented this approach by describing three theories (Ahroni’s Decision Making Model, Uppsala Model and Innovation-Related Internationalization Models). I also gave a description of two latest internationalization theories of SMEs, such as Born Global and Network theory.
The characteristics of major internationalization motives were also presented in this chapter of the thesis. Proactive motives reflect internal stimuli to change firm’s strategy, based on the firm’s development of markets possibilities. Reactive motives show the reaction of the firm to pressures in its domestic market or foreign market and regulate it by changing its activities.
There was a discussion of internal and external triggers, which initiate the process of
internationalization. The firm should overcome some export barriers to become successful in the international markets. Some of these barriers mainly affect the initiation of export
activities and others can hinder the process of internationalization.
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37
Chapter 3 Methodological part
In this chapter I will describe methodological issues which are related to my research. Also I will depict methodological aspects which are connected with the process of data collection. I will give the definition of methodology and description of every stage of the process of research methodology, such as philosophical position, research design, and research strategy, methods of data collection, data analysis, validity and reliability. The plan of the research process is presented on the figure 3.
Figure 3 – The research process plan
3.1 Definition of methodology
The term “methodology” refers to set of methods which show how a research should be undertaken (Saunders et.al, 2009). It means that it relates to analysis of methods which are suitable to the particular area of study or to the algorithms which are specific to a domain of
Stage 1
• Definition of methodology
Stage 2
• Choice of philosophical position
Stage 3
• Formulating the research design
Stage 4
• Research strategy
Stage 5
• Data collection
Stage 6
• Data analysis
Stage7
• Quality of the research issues
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38 knowledge. In other words, methodology technique has a purpose to organize an attempt to study a certain problem and suggest new knowledge.
There are several definitions of notion “methodology”. Silverman (1993) describes methodology as a general approach for studying a research topic, which can’t be right or wrong, but only more or less useful. Lawrence (1997) argues that methodology is not only the approach for the research, but also techniques for data collection. Babbie (2001) gives more simple definition of this notion. He assumes that methodology is a way to find a solution to a problem, which is stated in the research topic.
The choice of methodology is based on the purpose of the particular study and the researcher should take into account, when he/she make this choice, that there is no bad or good
methodology. Methodology can be only more or less appropriate under specific conditions of the research in order to reach the goal of the investigation (Hellevik, 1993).
3.2 Choice of philosophical position
According to Easterby-Smith et.al (2008) there are three main reasons which show an
importance of philosophical issues. First, it can be useful to clarify research designs. Second, researcher can recognize which designs will work and which will not by having knowledge of philosophy. Third, it can help the researcher to find a way how to adapt research designs according to the limitations of different knowledge frames.
There are three main epistemological approaches to the research of the social science:
positivism, relativism and social constructionism. According to the defined research topic of my work, it is possible to place my study in the frames of the social constructionism paradigm.
Easterby-Smith et.al (2008, p.58) noticed that social constructionism as approach has focus
“on the ways that people make sense of the world through sharing their experiences with others via the medium of language”. The major precondition of this approach includes the idea that “reality is determined by people rather than by objective and external factors”
(Easterby-Smith et.al, 2008, p.59). Hence, the researcher should evaluate the different meanings which are based on people’s experience.
Social constructionism approach has a set of implication which we can see in the table 3.2.
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39 Table 3.2. Implications of social constructionism (adapted from Easterby-Smith et.al, 2008,
p.59)
3.3 Formulating the research design
According to According to Yin (2009, p.26), the research design is “the logical sequence that connects the empirical data to a study's initial research questions and, ultimately, to its conclusions.” Nachmias and Nachmias (1992) consider the research design as a model of proof which helps the researcher to make a logical conclusions about relations among the variables during investigation. In other words, it is a guide during the process of collecting, analyzing and interpreting observations.
Yin (2009, p.27) underlines that”the main purpose of the design is to help to avoid the situation in which the evidence does not address the initial research questions”. It has to deal with a logical problem, not a logistical. Thus, the research design is much more than an ordinary plan of the work (Yin, 2009).
There are three different types of the research: exploratory, descriptive and explanatory.
The main intention of exploratory research is to define research questions and hypotheses (Yin, 2009). Robson (2002, p. 59) argues, that it is a way to find out “what is happening, to seek new insights, to ask questions and to access phenomena in a new light”.
Saunders et al. (2009) describe three way of conduction of the exploratory research:
- a search of the literature
- conversations with the experts in the field - conducting focus group interviews
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40 The main purpose of the descriptive research is to get a full description of a single
phenomenon within its context. It will help to explain and expand empirical generalizations (Yin, 2009). Churchill (1999) noticed that this type of the research is suitable when it comes to description of the social phenomenon of interest (for example, to describe demographic characteristics of the population) and making certain predictions, which are based on the main findings.
Explanatory research explains casual relationships between cause and effect (Yin, 2009).
This research type can be also called causal study. Churchill (1999) argues that the main purpose of this research is to analyze cause-effect connection in order to explain what kind of causes can lead to what effects. The researcher conducts causal study, when he/she has a clear view of the research problem.
I will investigate my research by using descriptive and exploratory elements. Descriptive research is useful in my study because the main purpose of work is to provide a better understanding of the internationalization process of the firm. This purpose is achieved by giving a detailed description of the internationalization process of different types of companies. Descriptive research answers the questions who, what, where, when and how (Mitchell and Jolley, 2007) and two main questions of my work are:
- What kind of motives can have impact on the decision of the firm to internationalize?
- What kind of barriers can the firm face during the internationalization process?
By using the elements of the exploratory research, I will give a deep insight in the process of internationalization. The interview with leader of the company “Taste of North” and the examination of the literature within the topic of my thesis are major parts of this research type.
3.4 Research strategy
Yin (2009) supposes that the choice of the research strategy depends on research question and purpose of the study, extent of existing knowledge, amount of time and other resources, such as philosophical foundation. There are five main types of the research strategies which help to collect and analyze empirical evidence. These strategies are: experiment, survey, archival analysis, history and cases studies. The researcher needs to evaluate the differences between
